Teledyne Technologies Incorporated — Q3 2021 Form 10-Q
Business context and reporting period. The quarter ended October 3, 2021; comparisons are with the quarter ended September 27, 2020. Teledyne supplies digital imaging, instrumentation, aerospace and defense electronics, and engineered systems. FLIR Systems, acquired May 14, 2021, is included in results from that date and is part of Digital Imaging, making reported year-over-year growth substantially acquisition-driven.
Key financial results
Amounts are in millions except per-share data. The nine-month period is year to date.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,311.9 | $749.0 | $3,238.6 | $2,276.9 |
| Operating income | $189.6 | $122.5 | $429.2 | $336.3 |
| Net income | $134.1 | $93.9 | $283.5 | $269.8 |
| Diluted EPS | $2.81 | $2.48 | $6.58 | $7.14 |
| Operating margin | 14.5% | 16.4% | 13.3% | 14.8% |
| Cost of sales as % of sales | 60.0% | 61.2% | 60.0% | 62.0% |
- Growth and comparability: Sales rose 75.2% in Q3 and 42.2% year to date. FLIR contributed $473.6 million of Q3 sales and $775.0 million year to date. Management also reported organic sales growth across segments.
- Profitability: Q3 net income increased 42.8%; year-to-date net income rose 5.1%, while diluted EPS fell from $7.14 to $6.58. The FLIR share issuance increased weighted-average diluted shares to 43.1 million year to date from 37.8 million. Q3 and nine-month operating income included significant FLIR purchase-accounting and transaction-related costs.
- Cash flow: Nine-month operating cash flow was $529.0 million versus $382.5 million. Investing cash outflow was $3,790.4 million, including $3.7 billion net cash paid for FLIR; capital expenditures were $67.6 million. Financing provided $3,147.3 million, principally from acquisition-related borrowing. Cash ended at $551.8 million, down from $673.1 million at year-end 2020.
- Debt and liquidity: Debt was $4,441.7 million versus $778.5 million at January 3, 2021; cash less debt implies net debt of approximately $3.89 billion. The $1.15 billion revolving facility had $751.1 million available after borrowings and letters of credit. Current assets were $2,534.9 million and current liabilities $1,421.8 million. The company reported compliance with debt covenants; leverage was 3.3x against a maximum of 4.75x and interest coverage was 9.6x against a minimum of 3.0x.
- Other indicators: Remaining performance obligations were $3,105.4 million, with approximately 80% expected to be recognized within 12 months. Goodwill was $7,899.5 million and acquired intangible assets were $2,705.2 million, largely reflecting FLIR.
Material changes and management commentary
- FLIR acquisition-related costs were $82.6 million pretax in Q3 and $259.8 million for the first nine months, including acquired-intangible amortization, inventory step-up, integration and transaction costs, and financing-related charges. FLIR contributed $35.2 million of incremental operating income in Q3 and $56.6 million year to date, after $82.3 million and $152.5 million, respectively, of related expenses in Digital Imaging.
- All four segments had higher sales year to date. Instrumentation operating income increased 24.7%, Aerospace and Defense Electronics 60.8%, and Engineered Systems 7.8%; Digital Imaging growth includes acquired FLIR results. Engineered Systems Q3 operating income declined 8.0%.
- Management expects 2021 capital expenditures of approximately $115 million. It expects a 23.9% full-year effective tax rate before discrete items and approximately $20.5 million of stock-option compensation expense. The filing provides no specific full-year revenue or earnings guidance.
- Management cited longer supply lead times and cost inflation for components, logistics and labor, expecting these trends to continue through the rest of 2021 and potentially beyond. COVID-related workforce and supply-chain disruption, commercial aerospace weakness, and successful integration of FLIR remain concerns.
Risks, contingencies and unusual items
- Swedish tax dispute: A FLIR subsidiary faces a Swedish Tax Authority reassessment totaling SEK 3.1 billion, reported as approximately $351.5 million including tax, penalties and interest. An adverse first-instance judgment was appealed; the appeal hearing occurred in September 2021. Teledyne recorded an acquisition-accounting liability for its assessed most likely outcome, but the filing text does not provide a clear value for that specific liability. The company warns an adverse outcome could materially affect cash flow. A $253.6 million letter of credit supports the disputed matter.
- Export-control matters: FLIR remains subject to a U.S. State Department consent agreement, with $3.5 million remaining to be paid, and has disclosed potential export-licensing violations to U.S. authorities. The company cannot reasonably estimate the timing or possible loss; fines, restrictions or suspension of export privileges could be material.
- Acquisition accounting: FLIR purchase-price allocations remain preliminary and subject to measurement-period adjustments, including for acquired intangible assets, tax positions and goodwill.
- Other exposures: Risks include inflation, supply shortages, foreign exchange and interest-rate movements, government-program funding, export restrictions and cybersecurity. Environmental remediation reserves were $6.5 million. Management said disposition of other pending legal matters was not expected to materially adversely affect the financial statements.
Important facts for investors to verify
- How much of reported sales and profit growth reflects FLIR versus organic performance, and whether integration benefits emerge after acquisition-related charges subside.
- The final FLIR purchase-price allocation and the level, timing and cash implications of acquisition-related costs and debt reduction.
- Developments in the Swedish tax appeal, the recorded liability, and any potential cash exposure beyond the posted letter of credit.
- Resolution of FLIR export-control reviews and any resulting penalties, license restrictions or purchase-accounting adjustments.
- Whether supply constraints and inflation affect margins, delivery schedules and the stated capital-spending outlook.